The perfume business

Scents and sensibility

Hutchison Whampoa is buying a troubled French perfume retailer

IT IS the end of a French success story. Twenty-one years ago Marcel Frydman launched Marionnaud after buying his first parfumerie in Montreuil. The firm became Europe's largest perfume chain, with 1,231 shops in 15 countries. Then last year it ran into difficulties, and Mr Frydman decided to seek a buyer. On January 14th, he found one. A.S. Watson, a manufacturing and retailing subsidiary of Hutchison Whampoa, a Hong Kong-based conglomerate controlled by Li Ka-shing, struck a deal to buy Marionnaud.

Mr Li will now be the world's biggest perfume retailer. This billionaire's firm already owns eight health-and-beauty chains with more than 4,500 shops in 19 countries. Its focus is the low end of the market, using mass-market brands such as Superdrug in Britain, Kruidvat in the Netherlands and Belgium, and Watsons in Asia. Through Marionnaud, he hopes to add French glamour to such drab offerings. Marionnaud is the market leader at home with a 30% share. It also has big chunks of the Italian, Spanish and Swiss markets.

Yet Mr Li may be underestimating Marionnaud's troubles. At the end of December Mr Frydman admitted to taking a €93m ($120m) charge to cover accounting errors in 2002-03. On January 11th the AMF, France's markets watchdog, suspended trading in Marionnaud shares and opened an investigation into the group's accounts. Marionnaud's debts are high. Mr Li is paying €534m for Marionnaud, as well as taking over €350m in debt and an estimated €350m in off-balance-sheet liabilities, such as rent for shops.

Many of Marionnaud's subsidiaries outside France are leaking money. Only its Austrian operation makes healthy profits. Even at home, Marionnaud expanded too quickly. There are two or even three Marionnaud shops, often only a stone's throw apart, in some commercial streets in France. It would make sense to shut one in three Marionnaud shops in France, says Olivier de Combarieu of Fitch, a credit-rating agency—but the unions would fight it.

Mr Li wants Marionnaud to take on Sephora, a perfume and cosmetics chain owned by Louis Vuitton Moët Hennessy (LVMH), a group of several dozen luxury-goods companies. Sephora, known for its trendy interior and even cooler assistants, has been something of a financial flop for Bernard Arnault, boss of LVMH, though things have improved lately. Ian Wade, managing director of A.S. Watson, believes that his firm can add some of Sephora's panache to Marionnaud, but do it more efficiently. Sephora's financial problems partly stem from its expensive store fittings and pricey brands. Mr Wade plans to cut such costs at Marionnaud by shipping in fittings such as ceilings and floorboards cheaply from China.

Hutchison's ambitions are even bigger for mainland China, where it has 100 drug stores and no upmarket brands. It plans to open some 1,000 shops there by 2010. Marionnaud could be the focus of that expansion, offering a way into China's booming cosmetics market—with sales forecast to rise over 50% by 2010. But first the new owners must sort out the French group's financial woes and get rid of the bad odour coming from its accounts.